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How important do you think revenue is for a business? Well, it is the most essential factor. A company may continue operations without profits, but without revenue, there is no hope for it to survive or grow. So, it is only fair to call revenue the lifeblood of any business. It is the basis for profits, which is the primary goal of businesses.
Revenues are of different kinds, and they play a significant role in measuring a company’s performance. Today’s article discusses operating revenue, the most consequential category that keeps the business going.
What is revenue?
Revenue is the money an entity earns by selling goods and services. In simple words, revenue is the total sale value of a business.
Revenue = Number of units sold * Average selling price
Revenue can be of two types – operating and non-operating revenue, depending on the source of money inflow.
What is operating revenue?
Operating revenue or revenue from operations refers to the earnings of a business through its regular operations. The regular operations here included the day-to-day business as usual functions carried out by an entity.
Let’s consider an example here to understand better. You run a home-based bakery. So your revenue from operations includes all the money you earn from selling cakes, breads and other confectioneries.
Revenue from operations forms an integral part of the financial statements of any business. It is recorded as the first item in the income statement (or Profit and Loss statement).
Operating revenue formula: The sum of earnings from all the units sold during a specific period.
Operating income vs revenue
Operating revenue and operating income are often used interchangeably, while the two are different.
Operating income comes from the operating revenue after subtracting all the related expenses. While revenue indicates the money earned, income indicates the money left after meeting all the expenses.
Operating income = Operating revenue – Operating expenses.
Continuing the above example, to run your operations, i.e., to bake, you require raw materials such as flour, sugar, flavours, oven, packing materials, etc. The costs related to these come under operating expenses.
You may incur other additional costs, such as rent, electricity, wages, etc. However, they are not considered operating expenses since they indirectly support your operations and not directly. These expenses are considered while calculating the net income of the business and not the operating income. Such indirect and overhead costs differentiate the operating income from the final overall income.
Operating vs non-operating revenue
A business may have additional sources of income apart from its regular operations, for example, income from investments, interest income, profits from selling assets, etc.
Such earnings are beyond regular operations and are recorded as a separate item in the income statement as “Other revenue”. Though it is a part of the firm’s overall revenue, it is not particularly helpful while assessing the firm’s efficiency.
What does the operating revenue of a company indicate?
Operating revenue signifies the potential of a business to earn money from its core activities.
- Comparing the operating revenue of a business from year to year shows how the business is growing. It is also a useful metric for comparing companies with their peers.
- It is helpful for stakeholders at various levels, including investors, to analyse the company’s market share, its performance, its ranking in the industry, etc. Operating revenue is one of the primary numbers that fundamental analysts look into while making investment decisions.
- Operating revenue helps companies formulate their strategies. Increasing the revenue and minimising operating expenses is essential to generate higher operating profits.
- Revenue from operations acts as the basis for various financial ratios, such as profitability margins, return on assets, etc. These ratios are essential to analyse the performance of a business.
Bottomline
Fundamental analysts use the company’s financial statements as one of the most critical tools while making investment decisions. Understanding what each item in the statement indicates, is essential to make accurate choices.
Revenue from operations or operating revenue is an important metric in the profit and loss account, suggesting the operational efficiency of a business. It is one of the key factors in analysing the growth of a business and comparing it with its peers. So, if you are a stock market enthusiast, look for the firm’s operating revenue before investing.
FAQs
Cost of revenue from operations refers to the total cost incurred by the business to produce or procure the required amount of goods and services, that will be sold later to earn revenues. It is also called the Cost of Goods Sold (COGS).
Cost of revenue from operations formula: Opening stock + Purchases + Direct expenses – Closing stock
Other operating revenue refers to money earned by the sale of scrap material and assets, interest income, etc. It refers to income earned through sources that are not directly connected to everyday operations.
Net operating revenue is also called operating income. It is the final income remaining with the business after clearing all the operating expenses. The net operating revenue is negative if operating expenses are more than operating revenue, and positive if operating expenses are less than operating revenue.
The operating expense ratio is a number that compares operating expenses with operating income. When the OER is low, it suggests that the expenses are low as compared to the income and is beneficial for investors.
Revenue is one of the primary factors contributing to the company’s EPS (Earnings per Share). When the revenue increases, EPS also increases, provided expenses do not increase disproportionately.